What to make of last quarter’s market volatility

Recent market volatility is a reminder that there are risks to investing. Given that markets has risen over the past 10 years without a major pullback, a downturn is a normal and healthy part of market movements. Without corrections, markets can become overvalued and bubbles can form.

Concerns about an economic recession, however, are still low; we continue to see strong fundamentals and a generally sound economy. Economic data remains strong, including consumer confidence, retail spending, and employment trends. And although the Fed has raised interest rates, they are still far below levels that might choke off economic growth.

All of this begs the question: if everything is fine, why did markets drop so suddenly? Several fear factors have come together to spook investors, including trade with China, uncertainty in Washington, and the Federal Reserve’s interest rate policy. These factors may continue to cause fluctuations in the short term, but it’s important to keep in mind that these do not reflect the fundamentals of corporate America or the economy.

Another factor likely contributing to rapid market decline is that much of the trading these days is done through hedge funds, ETFs, and automated trading. One manager noted that some 150 hedge funds are in the midst of shutting down operations, and as they closed their portfolios they were making massive sales before the end of the year. Trading done based on price movements may trigger automatic sales when a stock or an index falls to a certain level. This can trigger massive sell-offs even though companies are still fundamentally strong. It’s important to note that we also do not see the bank liquidity issues that froze the markets during the 2008 Financial Crisis.

Some of our money managers report that they are now buying quality companies at attractive prices. They see this downturn as an opportunity to buy at discounted prices the companies they have been following for some time but were not yet “on sale.” Our halal screening methodology also means that the companies they buy have lower debt relative to their peers, which makes them more resilient in a market downturn. For long-term investors, this is good news.

During market fluctuations, it’s important to tune out the market “noise” and focus on your financial goals. Remember that markets are cyclical; they don’t move up forever or down forever. You may remember that during the Financial Crisis, investors were scared that markets would never recover. That was a worst case scenario, but investors who stayed the course and remained focused on their financial goals were rewarded with the market recovery and growth.

If you’d like to speak with a financial advisor about your goals and risk tolerance, call 888.86.AZZAD or email info@azzad.net.